Bigfoot Riches and Bank Activism

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Bigfoot.

The chief executive officers of major public corporations tend to believe more whole-heartedly in their companies' missions, and prospects, and stocks, than the average investor does. So you'll often hear them complaining that the market undervalues their shares. Not so much with Carmine Biscardi, the CEO of Bigfoot Project Investments:

Told the market data service lists Bigfoot with a $10 billion market capitalization, Biscardi said, "Wow, that's a lot of money." Asked if that figure made any sense, or if there were any financials that would back up such a figure, Biscardi said "Oh, I wouldn't say so. I don't think so at all."

Biscardi took a moment to process the data. "Somebody doesn't have their facts right." He considered the figures. "If I was worth $10.4 billion, I'd do like that guy Trump and I'd run for president."

We talked just last week about Bigfoot Project, which does pretty much what it says it does -- looks for Bigfoot -- and which is currently trying to raise $15 million to find him. It trades over-the-counter on OTC Markets (the "pink sheets") under the ticker BGFT, has about 209 million shares outstanding, and a data service briefly listed it as having a stock price of $50.01, giving it a market capitalization of more than $10 billion. (Of which Biscardi owns more than half.) Except that that number is ... not at all real:

Where did that $50.01 stock price figure come from? A clue can be found on OTC's own website, which listed a bid-ask spread for the stock. Generally, the bid ask spread for a stock is the difference between what a seller is willing to sell a stock for and what a buyer is willing to pay. It's based on real-world market activity of buyers and sellers. On the OTC's website Wednesday morning, the spread for Bigfoot was listed as between 2 cents a share and $100 dollars per share. The midpoint of that? $50.01, the share price listed on the OTC's website.

We talked the other day about Neuromama, a $35 billion company that honestly seems to have less of a business than Bigfoot Project (and that was halted by the Securities and Exchange Commission for suspicion of manipulation). I mentioned how easy it is to get yourself a multibillion-dollar company: You just start a company, issue a billion shares, and trade a tiny number of them at prices of, you know, a few dollars. It costs you a few dollars. But the blind arithmetic logic of market capitalization says that if you trade one share at $10, and there are a billion shares outstanding, then you have a $10 billion company.

But it turns out you don't even need those trades! Stocks with $99.98 bid-ask spreads ... don't trade. Someone was perhaps willing to trade Bigfoot, but not that willing: Someone would buy a share for 2 cents (market cap: $4 million), if you really wanted to sell, or sell you a share for $100 (market cap: $20 billion), if you really wanted to buy, but that difference was enough to scare everyone away. Bloomberg lists no BGFT trades, ever, and the company's recent prospectus -- which offered shares to the public at 75 cents -- says that "As of July 29, 2016, the Company has not begun trading on the OTC Markets." If someone will buy a stock for $0.02, and someone will sell it for $100, there is not a lot of room for them to meet in the middle. But the blind arithmetic logic of midpoint pricing says that if the bid is $0.02 and the ask is $100, then the "fair" price is $50.01, and somehow you have a $10 billion Bigfoot company.

The moral here is that stock markets may or may not be efficient, but you have to at least have a market. Stock-market numbers may or may not have anything to do with any actual market.

BACtivism.

Here is some speculation that maybe an activist will go after Bank of America, based on the fact that an activist is ... sort of not going after Morgan Stanley: 

Activist investor ValueAct Capital Management LP took Wall Street by surprise when it disclosed Monday that it had bought a stake in Morgan Stanley, flouting conventional wisdom that activists don’t engage in banking because there are too many regulations to make a big difference in a company’s strategy.

But the Morgan Stanley stake, worth about $1.15 billion Tuesday, prompted a flurry of discussions about who might be next. Some Bank of America investors, frustrated by years of low returns, had reached out to activist investors, ValueAct included, to gauge their interest in getting into BofA, according to people familiar with the matter.

But it's not obvious that ValueAct wants to make a difference at Morgan Stanley -- "Instead, it is essentially endorsing Chief Executive James Gorman’s strategy" -- though it does have a history of working "behind the scenes with big investors to force change even at large companies." There's something to be said for that conventional wisdom. Big banks are big: ValueAct's $1.15 billion stake in Morgan Stanley is just 2 percent of the company; an equivalent fraction of Bank of America would cost over $3 billion. Also there are a lot of regulations.

More important than the quantity of regulation, though, is its kind. This is not the sort of thing where there is a complex set of rules and some clever activist can sit down and read them and come up with some better way of slaloming through them. Bank regulation is not about the regulations. You can't understand it by reading the Federal Register. The essential thing about bank regulation, for a bank, is its relationship with regulators. This means both the details of its internal dealings with regulation -- the thousands of employees devoted to stress testing, the Volcker Rule record-keeping, the trading-desk-level internal-model calculations around capital -- and also the human relationships between the bank's executives and its contacts at the regulators. If regulators trust that a bank's CEO is responsible and prudent, the bank is more likely to pass stress tests and less likely to have its business decisions second-guessed. If regulators don't like the CEO, they can probably just get rid of him.

This makes activism hard. You have a more aggressive business plan? You think it follows all the regulations to the letter? Doesn't matter; the regulators have soft power that extends well beyond stopping stuff that is explicitly forbidden by the rules. And they are talking to management, not you. You're just some activist, an outsider, and you are focused on shareholder value, which is exactly what regulators don't care about.

I (and others) sometimes joke that the big investment banks are socialist paradises run for the benefit of their workers rather than that of the capitalists who own their shares. Why is that? Part of it is that a lot of them have their roots in private partnerships, and when they went public, they maintained a sort of partnership mentality. Part of it is the fact that human capital really is the core of the business, and if the workers aren't kept happy the value of the franchise can disappear. But there is probably a regulatory component too. Banks are creatures of regulation in a way that most companies aren't, a "public-private franchise arrangement" where regulatory relationships are at the center of their operations. And those relationships belong to the executives, not the shareholders. 

Goldman retail banking

Disclosure: I used to work at Goldman Sachs, and I have an account with Goldman's new online retail bank. And Goldman has a reputation for a certain sort of snobbery. And, you know, I enjoy a little snobbery as much as the next person, even if the next person is also a Goldman alumnus. Anyway I laughed at this way of putting it:

Former Goldman staffers also wonder whether all the new arrivals at the digital consumer financial services unit — including a former head of marketing at Jockey International, the underwear company — will thrive at the bank, which has previously developed its own leaders.

Yes they just hope all the new hires at Goldman's online consumer bank will thrive. One thing that you sometimes hear in the financial technology world is that banks will have to become tech companies. A lot of the basic customer-facing business of banking is essentially algorithmic and automatable and is currently done with a lot of inefficiency, and in the long run people are obviously going to get loans by opening an app, not by going to a branch and sitting down with a loan officer. But banks tend to be dull-witted and slow-moving and risk-averse when it comes to technology, while fintech companies tend to be undercapitalized and naive about regulation. But a giant regulated financial-services company that has long been relatively tech-savvy, and that happens to have a banking license anyway, could find itself a nice niche.

Trading robots.

I feel like we've talked a lot recently, in a serious sort of way, about how the robots are coming to take over the financial industry. But there are a lot of bad robots out there. Here's a Commodity Futures Trading Commission action against Trademasters USA, LLC, which the CFTC alleges sold a fake trading robot. I mean, the robot wasn't entirely fake; according to the complaint, "Schacke bought a commodity futures trading software package off of the shelf, white labelled the product and called it his own TradeMasters trading software." But the returns were allegedly fake:

Schacke used paid actor testimonials on his website, including a misleading purported "real customer story" claiming that a customer made a 300% return in just three months. Schacke paid this purported "real customer," who was described as a "stay at home mom," to give a video testimonial. Schacke did not disclose that this was a paid testimonial and that this individual was not a customer and had never been a customer. Rather, the customer's results in this video were actually "cherry-picked" results from Schacke's personal proprietary trading account.

Also it wasn't all that much of a robot:

Additionally, Defendants use the expression "set it and forget it" on the TradeMasters website to describe the simplicity of the TradeMasters software product. The website explains that the TradeMasters product is a "100% automated" trading robot that executes trades for a customer's trading account and it does not require any customer intervention to monitor and adjust the trading activity after initially entering "stops, targets and triggers." However, the TradeMasters software is not fully automated as claimed and requires customer intervention and "coaching" by Schacke. Customers paid TradeMasters a monthly access fee to receive "coaching," which fee was not disclosed on the website, and Schacke, in return, would tell customers how to determine which markets to trade, quantity and timing parameters for their trades and how "to get out of a trade early because of a loss or a gain."

There is sort of a segmented market for individual algorithmic trading, with NASA data scientists building algorithms on Numerai in their spare time, on the one hand, while on the other hand people buy trading software based on YouTube videos with fake testimonials. In some ways they scratch opposite itches: The do-it-yourself algo-trading platforms are for people who think they can apply their technical skills to a new domain, and that the financial world is comprehensible and that they may be the ones to comprehend it. The set-it-and-forget-it algo-trading products are for people who believe that the financial world is essentially a magic trick, and that some guy on YouTube will sell them the secrets to the trick for the low price of $1,500 plus monthly coaching fees.

Elsewhere: "The hot topic in hedge fund land right now is the rise of the computer-driven investing."

Hedge funds.

I mean, the other hot topic in hedge fund land is fees, and how they're too high, and how they'll come down. Former hedge fund manager (and "Big Short" character) Steve Eisman is on-trend:

Eisman works at Neuberger Berman, a money management firm he joined after closing his hedge fund two years ago. He invests in classic hedge fund style, buying stocks he expects will rise in price while betting on others to fall. His services for an investment of $1 million cost 1.25 percent of assets per year. That’s not exactly cheap—many long-only mutual funds charge far less—but it’s a far cry from prices in hedge fund land, where the standard is a 2 percent annual charge plus a performance fee of 20 percent of profit.

Elsewhere: "Investors pulled an additional $5.7 billion from hedge funds in July, the third consecutive monthly outflow and bringing total redemptions to $20.7 billion over the period." And: "Hedge Funds Avoided Big Losses Despite ‘Brexit’ Shock."

Uber.

Here is some interesting musing from Chris Dillow about why Uber exists "as a form of cyber serfdom," in which the owners of the Uber software take a cut of the earnings of the people doing the driving, rather than as a driver-owned cooperative in which the drivers pay an app developer for some software and then use it to work for themselves. He mentions entrepreneurship, collective action problems, credit constraints. But it has all been a bit overtaken by events, because:

Starting later this month, Uber will allow customers in downtown Pittsburgh to summon self-driving cars from their phones, crossing an important milestone that no automotive or technology company has yet achieved. 

See, that is the reason that Uber did not form as a driver-owned cooperative: because its obvious long-term, and frankly medium-term, goal is to get rid of the drivers. (The self-driving Pittsburgh cars "will be supervised by humans in the driver’s seat for the time being.") Workers' cooperatives tend not to be enthusiastic about getting rid of workers. I don't know what that tells you about banks and fintech.

Elsewhere in Uber, Aswath Damodaran thinks it's overvalued.

Market structure.

Modern Markets Initiative "is the industry advocate supporting the benefits of automated, high frequency trading," and its CEO got picked off on some Yankees tickets, and his friends made some really obvious jokes:

Like a lot of season ticket holders, I put tickets for the games I can’t go to up for sale on StubHub.  I had a week’s worth of tickets on sale at face value as I watched the press conference with Alex Rodriguez and Yankees management.  I figured he was calling it quits at the end of 2016 due to lackluster play.  But instead he was calling it quits in a week!

I raced to my computer to take down my tickets for what would surely be a fast-sellout game.  But they were snatched up in the 30 seconds it took for me to log-in.  Sold to some quick-reacting StubHub buyer.

“So wait…” was the common reaction from the aforementioned friends and family.  “You got picked-off by a high frequency ticket trader?!?  Ha. Ha. Ha.  How does THAT feel?  Sort of like the stock market, isn’t it!?”

I don't have much of a point here. Everything is front-running. Elsewhere: "Welcome to the ‘Meat Casino’! The Cattle Futures Market Descends Into Chaos."

Kids these days.

Don't believe everything you read in an internet comment section, but if this isn't true it ought to be:

“At a family lunch, my teenage godson was asked by granny what he wanted to do when he grew up,” wrote FT commenter Messenger Featured. “He took his time, wistfully gazing into the distance, then looked his father straight in the eye and answered, ‘inherit’.”

I mean, reasonable.

People are worried about unicorns.

Erin Griffith:

Startups are rising to prominence faster than ever, and they’re staying private for long past their IPO-by date. For many, private markets are more attractive because publicly disclosing detailed financial information every quarter would hurt the appearance of “momentum” they’ve carefully crafted. Some believe they can more easily control their narrative as a private company, only disclosing business updates to the public when they choose.

But as Theranos and Zenefits and Hampton Creek and others show, it isn't that easy. In some ways the attention and hype given to unicorns makes it harder to control the narrative if bad news does get out; there's a sort of Einhornschadenfreude that makes people more interested in scandals at hot private companies than they might be at the public-market equivalents. The Enchanted Forest is a shadowy place, but also a judgmental one.

People are worried about bond market liquidity.

Here's "A Closer Look at the Federal Reserve's Securities Lending Program," a program that "helps alleviate security supply shortages and mitigate settlement fails" and is therefore, I assert, good for Treasury market liquidity. 

Things happen.

Fed’s July Minutes Show a Split Central Bank Seeking to Keep Options Open. The Wretched, Endless Cycle of Bitcoin Hacks. Not so SWIFT - Bank messaging system slow to address weak points. Former Health-Care Investment Banker Convicted of Tipping His Father on Deals. Caesars Suing Apollo to Stop Creditors From Suing Apollo. Caesars bankruptcy cards closer to being revealed. Big golden parachutes. Why Some Banks Are Thankful for Money-Market Strains. Vanguard Asks SEC to Approve an Active ETF for U.S. ‘Mystery Shoppers’ for Home Loans: Government Uses Undercover Techniques on Bank. Ex-Barclays Banker Roger Jenkins Said to Back Marijuana Venture. Millennials Are Actually Workaholics, According to Research. The Normandy Tank Museum is selling tanks. Hedgehog officers. Animated water polo violence.

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(Corrects hypothetical market valuation in seventh paragraph to $4 million.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net